Meaning of Director as per the Companies Act, 1956

A company is a legal entity and does not have any physical existence. It can act only through
natural persons to run its affairs. The person, acting on its behalf, is called Director. A Director is
any person, occupying the position of Director, by whatever name called. They are professional
men, hired by the company to direct its affairs. But, they are not the servants of the company.
They are rather the officers of the company.

The definition of Director given in this clause is an inclusive definition. It includes any person
who occupies the position of a director is known as Director whether or not designated as
Director. It is not the name by which a person is called but the position he occupies and the
functions and duties which he discharges that determine whether in fact he is a Director or not.
So long as a person is duly, appointed by the company to control the company's business and,
authorized by the Articles to contract in the company's name and, on its behalf, he functions as
a Director.

The Articles of a company may, therefore, designate its Directors as governors, members of the
governing council or, the board of management, or give them any other title, but so far as the
law is concerned, they are simple Directors.

Duties of a Director

There is no exhaustive list defining the duties of the Board of Directors towards the company
and shareholders. But based on the analysis of the provisions of the Companies Act, 1956 with
regards to a director, some general duties of a Director are mentioned herein:
To file return of allotments: a company must file with the Registrar, within a period of 30 days,
a return of the allotments, stating the specified particulars. Failure to file such return shall make
the Directors liable as 'officer in default'. A fine, up to Rs.500 per day, till the default continues
may be levied.

Not to issue irredeemable preference shares or shares, redeemable after 20 years: A company
cannot issue irredeemable preference shares or preference shares, redeemable beyond 20
years. Directors, making any such issue, may be held liable as 'officer in default' and, may be
subject to a fine, up to Rs.1, 000.
To disclose interest: A Director, who is interested in a transaction of the company, must
disclose his interest to the Board. The disclosure must be made at the first meeting of the
Board, held after he has become interested. This is because a Director stands in a fiduciary
capacity with the company and, therefore, he must not place himself in a position in which his
personal interest conflicts with his duty.

A company is not debarred from entering into a contract in which a Director is interested. It
only requires that such interest be disclosed. An interested Director should not take part in the
discussion on the matter of his interest. His presence shall not be counted for the purpose of
quorum for that item. He shall not vote on that matter. If he does vote, his vote shall be void.
Non-disclosure of interest makes the contract avoidable and not void. However, the concerned
Director may be subjected to fine, up to Rs. 5,000.

Duty to attend Board meetings - A number of powers of the company are exercised by the
Board of Directors in their meetings, held from time to time. Although, a Director may not be
able to attend all the meetings, but, if he fails to attend three consecutive meetings or, all
meetings for a period of three months, whichever is longer, without permission of the Board,
his office shall, automatically, fall vacant.

A Director's duties also include the following:

# To convene Statutory, Annual General Meeting (AGM) and also Extraordinary General
Meetings;
# To prepare and place at the AGM, along with the balance sheet and, profit and loss account, a
report on the company's affairs, including the report of the Board of Directors;
# To authenticate and approve annual financial statement;
# To appoint first auditor of the company;
# To appoint cost auditor of the company;
# To make a declaration of solvency in the case of a Members' voluntary winding up;

It is difficult to describe the duty of directors in general terms, whether by way of analogy or
otherwise. The nature of duties of director would depend not only on the nature of the
company's business but also on the manner in which the work of the company is distributed
between directors and other officials. A director need not exhibit in the performance of his
duties a greater degree of skill than may reasonably be expected from a person of his
knowledge and experience.
In case of a Non Executive Director : A director is not bound to give continuous attention to the
affairs of his company. His duties are of an intermittent nature to be performed at periodical
board meetings, and at meetings of any committee of the board upon which he happens to be
placed. He is not, however, bound to attend all such meetings, though he ought to attend
whenever, in the circumstances, he is reasonably able to do so. However an Executive Director
needs to give constant attention and take active interest in the affairs of the Company.
In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director, is in the absence if grounds
for suspicion justified in trusting that officer to perform such duties honestly. A director must of
necessity trust the officials of the company to perform properly and honestly the duties
allocated to those officials.

When presenting their annual reports and balance sheet to their shareholders and when
recommending the declaration of a dividend, directors ought not to be satisfied as to the value
of their company's assets merely by the assurances neither of their chairman, nor with the
experience or the belief of the auditor howsoever competent and trust worthy he is. All in all,
there is no difference between legal and equitable duties of directors. If the directors act within
their power with such care as is reasonably to be expected from them, having regard to their
knowledge and experience, and if they act honestly for the benefit of the company. They
discharge both their legal as well as equitable duty to the company. The directors are not liable
for all mistakes they make, although if they had taken more care they might have avoided
them.

What are the Liabilities of the Directors of a company towards the company?

The liability of a Director to the company may arise from:

Breach of fiduciary duty: Where a Director acts dishonestly to the interest of the company, he
will be held liable for breach of fiduciary duty. Most of the powers of Directors are powers in
trust and, therefore, should be exercised in the interest of the company and, not in the interest
of the Directors or, any section of members. Thus, in a case where the Directors, in order to
forestall a take-over bid, transferred the unissued shares of the company to trustees, to be held
for the benefit of the employees, and an interest-free loan from the company was advanced to
the trustees to enable them to pay for the shares, it was held to be a wrongful exercise of the
fiduciary powers of the Directors.

Ultra vires acts:

Directors are supposed to act within the parameters of the provisions of the Companies Act,
Memorandum and Articles of Association, since these lay down the limits to the activities of the
company and, consequently, to the powers of the Board of Directors. Further, the powers of
the Directors may be limited in terms of specific restrictions, contained in the Articles of
Association. The Directors shall be held, personally, liable for acts beyond the aforesaid limits,
being ultra vires the company or the Directors. Thus, where the Directors pay dividends or
interest out of capital, they will be liable to indemnify the company for any loss or damage,
suffered due to such act.

Negligence: As long as the Directors act within their powers with reasonable skill and care, as
expected of them as prudent businessmen, they discharge their duties to the company. But,
where they fail to exercise reasonable care, skill and diligence, they shall be deemed to have
acted, negligently, in discharge of their duties and, consequently, shall be liable for any loss or
damage, resulting there from. However, error of judgment will not be deemed as negligence.
The Directors cannot be absolved of their liability for negligence by any provisions in the
Articles of Association.

Mala fide acts: Directors are the trustees for the money and property of the company, handled
by them, as well as for exercise of the powers, vested in them. If they dishonestly or in a mala
fide manner, exercise their powers and perform their duties, they will be liable for breach of
trust and, may be required to make good the loss or damage, suffered by the company by
reason of such mala fide acts. They are also accountable to the company for any secret profits
they might have made in course of their performance of duties on behalf of the company.
Directors can also be held liable for their acts of 'misfeasance', i.e., misconduct or willful misuse
of powers. However, misconduct, which is not willful, shall not amount to 'misfeasance'.

Where a Director misapplies or misappropriates the money or properties of the company or,
has been guilty of breach of trust or misfeasance, the Court may order him to repay the money
or, restore the property or, to pay compensation.

Can a Director be made liable for the acts of his Co-Directors?

A Director is the agent of the company, except for matters to be dealt with by the company in
General Meeting and, not of the other members of the Board. Accordingly, except in one
instance, nothing done by the Board can impose liability on a Director, who did not participate
in the Board's action or, did not know about it. To incur liability, he must either be a party to
the wrongful act or, later acquiesce (consent) to it. Thus, the absence of a Director from a
meeting of the Board does not make him liable for the fraudulent act of a co-Director, on the
ground that he ought to have discovered the fraud, except where he had the knowledge or, he
was a party to confirm that action.
Where a Director is made liable for the acts of a co-Director, he is entitled to contribution from
the other Directors or co-Directors, who were a party to the wrongful act. However, where the
Director, seeking contribution alone, benefited from the wrongful act, he is not entitled to
contribution.

Board's powers and restrictions thereon

General powers of Board

(1) Subject to the provisions of this Act, the Board of directors of a company shall be entitled to
exercise all such powers, and to do all such acts and things, as the company is authorised to
exercise and do:

Provided that the Board shall not exercise any power or do any act or thing which is directed or
required, whether by this or any other Act or by the memorandum or articles of the company
or otherwise, to be exercised or done by the company in general meeting:

Provided further that in exercising any such power or doing any such act or thing, the Board
shall be subject to the provisions contained in that behalf in this or any other Act, or in the
memorandum or articles of the company, or in any regulations not inconsistent therewith and
duly made thereunder, including regulations made by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate any prior act of the
Board which would have been valid if that regulation had not been made.

Certain powers to he exercised by Board only at meeting

(1) The Board of directors of a company shall exercise the following powers on behalf of the
company, and it shall do so only by means of resolutions passed at meetings of the Board :-
(a) the power to make calls on shareholders in respect of money unpaid on their shares;
(b) the power to issue debentures;
(c) the power to borrow moneys otherwise than on debentures;
(d) the power to invest the funds of the company; and
(e) the power to make loans :
[Provided that the Board may, by a resolution passed at a meeting, delegate to any committee
of directors, the managing director, the manager or any other principal officer of the company
or in the case of a branch office of the company, a principal officer of the branch office, the
powers specified in clauses (c), (d) and (e) to the extent specified in sub-sections (2), (3) and (4)
respectively, on such conditions as the Board may prescribe:
Meetings of Board

Board to meet at least once in every three calendar months. In the case of every company, a
meeting of its Board of directors shall be held at least once in every [three months and at least
four such meetings shall be hold in every year]:
Provided that the Central Government may, by notification in the Official Gazette, direct that
the provisions of this section shall not apply in relation to any class of companies or shall apply
in relation thereto subject to such exceptions, modifications or conditions as may be specified
in the notification.]

Well, the reference may be very old but it still beautifully summarizes the duties
of the Director of a company in a simple sentence. Gone are the days when
some family driven organizations used to call them monopoly of the market
while doing as they wish to shame Corporate Governance and ethics to the
largest extent possible. The modern shareholders are more aware of their
responsibilities than ever and more powerful than anyone can imagine. With
Shareholders revolution, it is a democracy in company affairs and the
shareholders are the supreme power which appoints its ministry in the form of
directors to run the show and make money for them. In the process the
Directors are given necessary powers but obviously more responsibility. The
Companies Act 2013 has ensured this balance of Power vis-à-vis responsibilities
is maintained to most benefit to the Shareholders and ensure Corporate
governance to the maximum extent possible. It utilizes both regulatory
measures as well as penal measures including stringent judicial measures to
ensure the regulations are properly followed and to avoid any mishap in
corporate governance and to maintain the legal sanctity of the organization.
Let us explore the uniqueness of this new era of corporate governance and
create awareness of the duties of the Directors.

History of Indian Companies Law

The concept of regulated companies ushered from the “Merchant Guilds” of
England. The notorious East India Company, established through a Royal
Charter in the year 1600, may be the first of the well-known surviving company
having its presence established in India. Registration of companies can be
traced back to 1844 in England when the Joint Stock Companies Act was
passed, which got established in India in 1850 and further the Joint Stock
Companies Act got passed in India in 1857. This Act brought the concept of
Limited Liability for the first time in India. In 1866 the first Companies Act was
passed in India to regulate registration, regulation and wind up of companies
and its associations. The Indian Companies Act got established in 1913 in line
with the English Acts and as such the decisions of the English Courts were
closely followed.

Post-independence, in the year 1956, the committee under the chairmanship of

H C Bhaba recommended the Companies Act 1956 in the parliament, which
came into effect from 1stApril 1956. This Companies Act got amended a few
times since then, the final amendment being the Companies Act 2013.

Director & the Board in Companies Act

The term “director” in Companies Act 2013 under Section 2 (34) is defined as
“a director appointed to the Board of a company”., wherein ―Board of
Directors‖ or ―Board‖, in relation to a company, means the collective body of
the directors of the company. As per Chapter XI, Section 149 of the Companies
Act 2013, it is mandatory for every company to have a Board of Directors, the
composition should be as follows:

1. Public Company: Minimum 3 and maximum 15 nos. of Directors; at least 1/3 rd

number of Independent Directors
2. Private Company: Minimum 2 and maximum 15 nos. of Directors
3. One person Company: minimum 1 director
4. At least 1 woman director
 5. At least 1 Director who has stayed in India for minimum 182 days in the previous
calendar year.

The Companies Act 2013 gives recognition to the idea of Independent Director,
which was earlier part of the listing agreement only. It means a director other
than a whole time director or the Managing Director or a nominee director who
fulfills the criteria’s mentioned in Section 149.

As per section 266A and 266B of the Companies Act, 1956 Director
Identification Number (DIN) is a unique identification number issued to existing
and/or potential directors of any incorporated company. As per Companies Act
provisions every director shall be appointed by the company in general meeting,
provided they have been allotted the Director Identification Number (DIN) and
on submission of a declaration that he/she is not disqualified to become a
director.

An additional director is appointed by the Board of Directors through the Boards

vested power to hold office till next general meeting. An alternate director may
be appointed by the Board of Directors to act as a Director in absence for a
period of not less than 3 months and not more than the allotted period for the
director for whom the replacement is.

The Board may appoint any person as a director nominated by any institution in
pursuance of the provisions of any law for the time being in force or any
government regulation or shareholdings, such directors are known as
Nominated Directors.

As per Principle of Proportional representation the articles of a company may

provide for the appointment of not less than two-thirds of the total number of
the directors of a company, and such appointments may be made once in every
three years and casual vacancies of such directors shall be filled as provided in
sub-section (4) of section 161.
People of unsound mind, undischarged insolvent, convicted by a court of any
offence and either / or imprisoned for a period of 7 years or more, convicted of
the offence dealing with related party transactions under section 188.

Duties of Director
Major Corporate Debacles of recent times like Kingfisher, Sahara, Satyam etc
has again and again proved the inability of Company Act 1956 to be ineffective
in upholding Corporate Governance. Every time it is the Directors who are
responsible in breaking Shareholders expectation and sometimes betraying the
sentiments of stakeholders under a false veil of charisma, while using the
corporate mechanism to fulfill personal welfare. To meet this challenge
Companies Act 2013 has been enacted almost 50 years after the last
amendment. It is built on the principles of responsibility of the Board, protection
of interests of the Shareholders, self- regulation and openness through
disclosures. The 2013 amendment has ensured several effective measures
through clearly defining liabilities and responsibilities of the Directors and penal
actions on failure to follow the same.

The Duties of the Directors has been ensemble under Section 166 of the 2013 Act and applies to all types
of Directors including Independent Directors. The Duties and Responsibilities can be broadly classified
into two categories:

 The duties, liabilities and responsibilities which promotes corporate governance

through the sincerest efforts of directors in efficient management and swift
resolution of critical corporate issues and sincere and mature decision making to
avoid unnecessary risks to the corporate entity and its shareholders.
 Keeping the interests of company and its stakeholders ahead of personal
interests.

NOW LET US DELVE INTO THE SECTION 166 OF THE 2013 ACT THAT

STIPULATES THE DUTIES OF THE DIRECTORS AS FOLLOWS :

 1. A director must act in accordance with the Articles of Association of the company
2. A director must pursue the best interests of the stake holders of the company, in
good faith and to promote the objects of the company.
3. A director shall use independent judgement to exercise his duties with due and
reasonable care , skill and diligence.
4. A director should always be aware of conflict of interest situations and should try
and avoid such conflicts for the interest of the company.
5. Before approving related party transactions the Director must ensure that
adequate deliberations are held and such transactions are in interest of the
company.
6. To ensure vigil mechanism of the company and the users are not prejudicially
affected on account of such use.
7. Confidentiality of sensitive proprietary information, commercial secrets,
technologies, unpublished price to be maintained and should not be disclosed
unless approved by the board or required by law.
8. A Director of a Company shall not assign his office and any assignment so made
shall be void.
9. If a director of the company contravenes the provisions of this section such
director shall be punishable with fine which shall not be less than one Lakh
Rupees but which may extend to five Lac Rupees.

To ensure independence and equitableness of the Board, the Companies Act

2013 also casts various responsibilities on the Independent Directors. An
Independent Director is a member of the Board of Directors, but doesn’t owns
any share of the company nor does have any financial relationship with the
company other the sitting fees it receives. As per Schedule IV of the Companies
Act 2013

1. Protecting and promoting interests of all and specially for Minority Stakeholders
2. Acting as a mediator in case of Conflict of Interest amongst the stakeholders
3. Assistance in forwarding independent and equitable judgement to the Board of
Directors
 4. Adequate attention towards related party transactions
5. Honest and impartial reporting of any unethical behavior, violation of code of
conduct or any suspected fraud in the company.

Penal Provisions
The Companies Act has various penal provisions to ensure proper adherence to
the Duties and Responsibilities laid out. In Companies Act 1956, the concept of
“Officer in Default” was inclusive of the Board of Directors. Under Section 2 (60)
of Companies Act 2013 the idea of “Officer who is in Default” has been
stipulated under lapse in duty in the circumstances that the officer is in default
for any provision of the act and is part of such contravention either self or
participation without objection shall be liable to penalty or punishment including
imprisonment. The Director under scrutiny here can also include Nominee
Directors. The matter is very sensitive as even if the Director is not part of such
meeting , but has received the information of contravention in any form is liable
and can be held party to such act. Hence it is important that the voice of
objection of the Director needs to be mandatorily recorded to avoid any such
implication on innocent person.

The penalty amounts applicable under Companies Act 2013 are more higher in
denomination and very stringent compared to the 1956 amendment. The
minimum fine applicable is INR 25,00/-, whereas can be even more than INR 25
Crore. Proven Defaulter on Section 166 (codified duties) can be fined anything
between 1-5 lakhs. Some examples of violations which can attract penalties of 1
crore and above are violations for provisions under

 Section 8 : Not for Profit companies,

 Section 42: Subscription of securities on Private Placement
 Section 46: Duplication and issuance of share certificates with intent to defraud
 Section 74 (3): Failure in repayment of deposits within specified time
 Section 195 (2): Insider Trading
According to Section 149 (12) of Companies Act 2013, an Independent Director
is similarly liable for such acts which is attributable through Board processes
with the Director’s knowledge and with his consent or where the Director has
not taken action diligently. Hence it is extremely important for Independent
Directors to give consent to any Board proposal only with due caution. Although
in case of such act of default is noticed by law the summons are issued
irrespective of the category of Director and it lies with the Director to prove its
innocence.

Under the Companies Act 2013 certain defaulters can attract imprisonment,
mostly non-cognizable. However offences connected to fraud or intent to fraud
are cognizable (no warrant required for arrest). Like suppressing any material
information or furnishing false information is cognizable under Section 7 (6),
providing misleading statement in the prospectus under Section 34, inducing
fraudulently for investment is cognizable under Section 36, transfer or
transmission of shares with intent to defraud under Section 56 and offences
related to reduction of share capital under section 66.

In Companies Act 2013, under Section 245 , Shareholders or group of minimum

100 Shareholders on behalf of all affected parties can bring “class action suit”
against the Company and the Directors for any wrong doing. This will be taken
up by National Company Law Tribunal for expedited resolution for the
shareholders. In addition to Companies Act 2013, lots of other acts are
interrelated and can attract penal action based on multiple conflicts. So , the
Director needs to be aware of the interdependencies of different laws and how
they can influence the decisions they are going to implement.

Liability of Directors
The Liability of the Directors can be both joint or collective for any and every act
prejudicial to the interests of the company. Though the Director and the
 Company are separate entities, under the following cases the Director may be
held liable on behalf of the Company:

 Tax Liability: Unless a Director or any Past Director can prove that the non-
recovery or non-payment of Taxes are attributable as gross neglect or breach of
duty, then any present or past Director (pertaining to the time period of defaulter)
will be liable to pay the shortfall in tax amount and any penalty associated.
 Refunding of share application or excess in share application money
 To pay for qualification shares
 Civil Liability in case of misstatement in Prospectus
 Fraudulent Business Conduct and all associated debts and contracts executed
 Failure in making disclosures as stipulated SEBI (Acquisition of Shares &
Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading)
Regulations, 1992 by the directors may attract legal proceedings by SEBI

The Role Of The Company Director

The role of a director is to manage the day to day operations of the company. This
includes the following:

 To open and operate bank accounts

 To bind the company by entering into deals and contracts
 To execute documents on behalf of the company
 To appoint agents and employ staff

When exercising these powers, directors operate as a board as no individual

director can make decisions on behalf of the company (unless they are a sole
director) and such decisions must be discussed and voted on at board meetings.

The company’s articles may allow for one director to be empowered to make any
and all decisions affecting the day to day activities of the company, this individual is
known as the managing director (MD). It should be noted that the MD must still
discuss more important decisions (company strategy and/or large contracts and
purchases) with the other members of the board.

Legal Functions of Board of Directors

The board of directors also perform certain legal functions required
as per the Companies Act 1956 like criminal liabilities.
The following table presents legal functions of the boards.

Table1: Legal Functions of Board of Directors

I. Duty of Loyalty
 Avoiding conflicts of Interest
 Fairness
 Corporate Opportunity (Ahead of Personal)
 Confidentiality
II. Duty of Care
 A director performs his duties in good faith and in a manner
that he serves for the best interest of the corporation, and as an
ordinary person in a like position under certain circumstances.
 Attention at meetings, Reliance on management and
professional information and Delegation (to management to
operate the business)
 Decision Making – exercise reasonable business judgement.

Formal and Informal Functions of BOD

In fact, the board has to direct and lead the executives. The directing
function has both formal and informal components. The board,
formally reviews and screens the executive decisions and informally
directs the activities in view of environmental factors. In general,
the board directs, guides and controls the top executives in
formulating, implementing, evaluating and controlling objectives,
policies and strategies.

In Practice: Mace, in his research, found that the board of directors

actually
1. Serve as source of advice and counsel;
2. Offer some sort of discipline, value; and
3. Act in crisis situations,” instead of performing (as per the
concepts) of

 Selecting top executives;

 Determining policy;
 Measuring results;
 Asking discerning questions.